Cap on Bank Rates has Complicated the Conduct of the MPC – CBK Governor

New borrowers with low credit ratings and no security might not receive loans from Kenya Commercial banks with the capping of lending rates when the Banking (Amendment) Act 2016 came into force the Central Bank Governor said Wednesday.

Dr. Patrick Njoroge indicated that with the law coming into force, ‘It has complicated the conduct of the Monetary Policy Committee (MPC)’.

“Existing borrowers will benefit, but what happens to the risker borrowers at the margin? They may be cut off from lending,” he told the media.

“It’s unclear which way this will go. We haven’t done it before,” he added.

The Governor was speaking a day after the MPC lowered the CBR by 50 basis points to 10.0 percent as a result of the persistent slowdown in private sector growth.

Njoroge however, reiterated that as a regulator, they will implement the law as it is because the banks are required to lend at 14 percent from 14.5 percent.

“Our mandate is clear on what the MPC has to do and what the CBK has to do. Do not complicate with anything else. It is unexpected if you know the truth. Don’t blame the MPC it did its mandate,” says Njoroge in response to the market analysts who had projected that the MPC would maintain the CBR at 10.5 percent and the dynamism that the banks have to contend with.

According to Cytonn Investments, the effect of signing the Bill was felt immediately within the financial markets. They noted that the banking sector stocks declined by 15.6 percent in 2-days of trading, investors lost Kshs 88.9 billion in the same span of 2-days , highlighting the immediate negative impact of the decision on foreign sentiment towards the banking sector’s future.

Banks with large retail bases such as Equity Group and Co-operative Bank were the worst affected, both losing 20.3 percent and 20.6 percent, respectively, while the least affected counters such as CfC Stanbic and Standard Chartered, both losing 6.3 percent and 7.8 percent, respectively.

Read: Listed Banks Bounce Back at the NSE

Equity Group Holdings Ltd. Chief Executive Officer James Mwangi is on record stating that capping of interest rates might favor the biggest banks as small lenders will struggle to raise cheap deposits to fund lending.

However, the CBK Governor said although the concerns they raised earlier on capping of interest rates remain, “The CBK will continue to put in place measures to sustainably reduce the cost of credit and improve liquidity management.”

Njoroge further noted that in the period some banks tried to move their assets to government securities and for those that are allegedly raising the charges, they cannot do so without the approval from the Central Bank.